Despite this there was a net interest margin (NIM) compression. The December quarter margins fell to 4.2 per cent . Much of the compression was due to change in interest computation on savings bank accounts, leading to increase in interest costs.

The gross advances growth of 32.7 per cent over the same period last fiscal, translated into a 25 per cent growth in the net interest income. The credit growth was driven largely by high yielding retail loans.

The margin compression was limited due to strong rise in the credit-deposit ratio from 77 per cent in December 2009 to 82 per cent as of December 2010. The ratio is significantly high as compared to historical average of the bank and it remains to be seen if this is sustainable .

This despite having higher tier-1 (core equity) ratio, as the core equity may shrink if the loan book continues to grow at such a rate . Loan-loss provisioning, despite growing at a modest pace enabled the bank to improve the provision coverage significantly.

The net NPA ratio as a result of this fell from 0.5 per cent to 0.2 per cent. The non-performing asset seems to be low for a bank with a high proportion of retail loans.

Sequential numbers of HDFC Bank appear impressive given that the NIM was maintained even as the market was expecting a compression due to steep rise in marginal cost of funds.

This trend is similar to what was witnessed with ICICI Bank and Axis Bank. The trick having been achieved by an improved retail loan proportion from 51.7 per cent to 55 per cent .

Outlook

The advances growth was more than 7 percentage points higher than the banking system. The above-average industry growth may continue even as the competition in retail loan segment begins to get more intense.

The bank has one of the lowest base rates in the banking system of 7.75 per cent. A higher proportion of working capital loans and short-term loans in the advances book allows the bank to have a low base rate.

Majority of the corporate loans despite being fixed rate in nature have maturity of less than one year which would reduce the interest rate risk for the bank.

Low-cost deposit proportion (50.5 per cent as of December 2010) continues to be among the best-in-industry and may help in maintaining the margins.

(This article was published in the Business Line print edition dated January 28, 2011)

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